Investing in Mexico

Introduction. The Mexican Government continues to enact reforms, including the privatization of many economic areas, making the Mexican economy one of the most open economies world-wide. Investors from throughout the world both have been afforded greater access to the Mexican economy and greater protection for their investments in Mexico.

Legal System. Mexico is a federal, democratic Republic divided into 31 States and a Federal District. Each State has its own Constitution based on the Federal one, and is free to legislate in areas outside the Federal Constitution. The Federal Government, each State and the Federal District all have three branches of government; (i) the Legislative; (ii) the Executive; and (iii) the Judicial.

Unlike the common law system, whereby much of the law is contained in uncodified judicial resolutions in Mexico, all of the law is contained in statutes and ensuing regulations and decrees. Judicial interpretation is limited to the parties involved in a particular case. Thus, the judge’s duty is to apply the appropriate provisions and to reason deductively thereof and consult judicial precedence without being bound by it.

Foreign Investors and Investment. Generally, foreign investors can participate, in any proportion, in already existing Mexican companies or establishments or create and open new ones, except in certain sensitive areas where they can not totally or partially participate as provided for in the Mexican Constitution, the Investments Law and other statutes.

Corporate Forms. The General Law of Commercial Companies (Federal Law) provides for the organization of several types of companies, each varying in their legal and tax treatment.

The limited liability stock corporation (“Sociedad Anónima”) is the most frequently used corporate form and may incorporate as a fixed capital company (“S.A.”) or that of a variable capital company (“S.A. de C.V.”). Recently, another form of limited liability corporation, the “Sociedad de Responsabilidad Limitada” or “S. de R.L.”, has become popular for closely held corporations, and could also be of variable capital.
Foreign companies are legally recognized and can operate through Mexican branch offices.

However, they must be approved by the National Commission of Foreign Investments and Ministry of Foreign Relations, and be registered at the Public Registry of Commerce.

Although not a separate legal entity, the Association in Participation (“Asociación en Participación”) or (“AP”) is another common form of doing business “in” Mexico.
Generally, an AP is an agreement in which one or more partners (“asociados”) give goods or services to a managing partner (“asociante”) responsible before third parties, in exchange for a right to participate in the profits of a commercial operation controlled by such managing partner. Mexico has not enacted a Dealer’s Act or Transfer of Technology.

Statutes like many other Latin American jurisdictions. Such Acts and Statutes state limitations on the execution, performance and causes of termination.Any of the foregoing vehicles will be governed by general contract provisions. Methods of Doing Business “with” Mexico.

A foreign company doing business with Mexico from abroad has traditionally used three commercial vehicles: (1)commission (sales) agent for the promotion of its goods or services; (2) an agreement with an independent distributor in Mexico; or (3) licensing technology (e.g. franchise operation).

Labor Regulations. Labor relationships are established regardless of a labor agreement, when there is a relation with the elements of subordination (employee follows the directions of the employer) and dependency (economic dependency on the employer). Under the Labor Law, commercial agents or sales promoters, are considered employees when their activity is permanent.

Employees may be dismissed with or without “fair cause”, as statutorily defined. “Fair cause” basically includes only significant violations by employees of employment terms to the detriment of the employer. In the event of dismissal without fair cause, the terminated employee will, at his option, have the right to: (i) Demand reinstatement, he/she is a trusted employee (unless (“empleado de confianza”), in which case he/she will only receive payment of the following termination indemnities); (ii)Three (3) months’ salary; (iii)Twenty (20) days’ salary for each year of employment; (iv) Seniority premium equal to twelve (12) days salary per year of employment; (v) Proportional share of vacation, annual bonus, and profit sharing, for the year in which the employment was terminated; and (vi) Salaries accrued from the date of termination to the date of payment of indemnities.

Temporary Entry of Business Persons. There are many types of visas, but among company officers the “Visitor’s Visa” is the most commonly used. If this Visa is sponsored by the foreign company, the officer is prohibited from engaging in any money earning activities in Mexico. Otherwise, this Visa can be sponsored by the local company in Mexico and allows the officer/employee to engage in money generating activities. Such Visas permit a one year stay and are renewable.

A recently created NAFTA business visa called “FM-N” allows business people from Canada and the USA to stay in Mexico for up to 30 days to perform business activities, as long as they do not earn money in Mexico.

Tax. A Corporate Tax assessable at a maximum rate of 34% must be paid annually on the Company’s taxable profits. Most of the Company’s income is considered accruable at the time invoices are issued or when goods are delivered to the buyer if no invoice is issued. Allowable deductions are expenses strictly necessary for the carrying out of the Company’s business.

Companies will be obligated to pay a Federal Tax on Assets, established at a 1.8% rate.

Salary payments for employees residing in Mexico will be subject to a graduated withholding tax of up to 35%.

Companies should make social security and other labor related contributions which can amount to up to 35% of the payroll.

Value Added Tax (“VAT”) for everybody is established at 10% in the border areas and 15% elsewhere, based on the price for the transfer or lease of goods, rendering of services, and exportation or importation of goods and/or services. Companies and business concerns may offset the VAT paid against the VAT transferred from customers and the difference will be paid to the Government.

Intellectual Property Law.

The following are protected for a specific period of time: patents (20 yrs.); industrial designs (15 yrs.); utility models (10 yrs.); trademarks (10 yrs.); and trade names (10 yrs.). Under the Federal Copyright Law, the right of authorship extends for 75 years after the date of first publication.

Environmental Legislation. It is both federal and local and is very comprehensive. Recent Reforms are oriented at substantially strengthening the criminal sanctions for violations regarding industrial waste and water pollution. Before initiating operations, parties must file an Environmental Impact Evaluation with the Government. Authorization is required for any persons engaging in activities that may cause ecological imbalances or exceed the limits established in the Law or in the Regulations.

Antitrust. This Statute is particularly concerned with the “effects” that the acts and practices regulated by it may have on the free-competition economy in Mexico. The Statute applies to all transactions regardless of the location where the transaction occurred or the nationality of the parties involved. The Statute prohibits: (i) absolute monopolistic practices; (ii) relative monopolistic practices; and (iii) concentrations.

Financial Services in Mexico. Previously, all matters related to banking were reserved exclusively to Mexican nationals. Mexico has afforded access to foreign financial service providers through new legislation, regulations, interpretations and other measures implemented and enforced by the Treasury Department, the Central Bank and its affiliated regulatory commissions

Electrical Power Industry. Electricity generation for public use is restricted exclusively to the Mexican Government. However, related activities, such as the: (i) construction of electricity generating plants; (ii) construction of electricity conduction lines and networks; and (iii) electrical installations in buildings, may be owned in up to 49% by foreign investors. However, foreign investors may participate in a proportion greater that 49% in private generation if they obtain a ruling from the Government when demonstrating the benefits to the Mexican economy under previously established criteria.

Mexican Mining Industry. The Mining Law specifies the certain minerals or substances that may not be subject to concessions, which among others include: petroleum, hydrocarbons (solid, liquid or gaseous), radioactive minerals, products derived from the decomposition of rocks that may be exploited from the surface.

Railroads. The Government is currently granting concessions for railroad services to private investors. All concessions are granted to Mexican companies which may have up to 49% foreign equity in its capital stock or a higher percentage with the prior approval of the Foreign Investments Authorities. The permits to render the auxiliary services at passenger and cargo terminals, and for maintenance and supply of railroad equipment will only be granted to Mexican individuals or companies which may however have up to 100% foreign equity in its capital.